Thirty-seven European banks have launched a new energy efficiency mortgages pilot scheme to help boost the market for homes with lower energy bills.
The two-year scheme has been developed by the World Green Building Council’s Europe network under the EU-funded Energy Efficient Mortgages Initiative to trial new European criteria for mortgages that incentivise energy reduction.
The banks, which include BNP Paribas, ING, Nordea Bank and Société Générale, believe the initiative will test whether their risks are lowered because homeowners with reduced bills are less likely to default on mortgage repayments. Such loans would then represent a lower risk on their balance sheet and could therefore qualify for a better capital treatment.
The sheer number of participating banks is proof that big investors are recognising that energy-efficient buildings can be better investments. They will be investigating how the scheme’s criteria can be applied across their mortgage businesses over the coming years with the aim of establishing a new generation of energy efficiency mortgages that help drive energy use reductions across the property sector.
The banks will identify “energy efficient” assets in their risk profiling, to help price-in the added value of energy efficient real estate.
New-build homes will be chosen for the mortgages that meet eligibility thresholds established by the green building councils (GBCs). These are either national “nearly zero energy building” standards as required by EU climate regulations, or 20 per cent better than national standards.
The UK GBC is one of 10 participating green building councils involved together with the European Mortgage Federation – European Covered Bond Council, Ca’Foscari University of Venice, RICS, the European Regional Network of the World Green Building Council, E.ON, and SAFE Goethe University Frankfurt, which all participated in a market consultation with over 500 experts to develop the pilot and ensure it is applicable at the local level.
In the UK, renovations will need to achieve a 30 per cent reduction in energy demand, backed up by a new energy performance certificate.
“The commitment by Europe’s leading banks to this pilot shows green building is hitting the mainstream,” WorldGBC chief executive Terri Wills said.
“WorldGBC’s Europe network has developed energy performance criteria for new builds and renovations to help set a consistent market standard for banks issuing green mortgage products. We look forward to developing the standards over time to support the investor community in addressing climate risks.”
E.ON UK chief executive Michael Lewis commented that green mortgages “have the potential to unlock an energy efficiency revolution by enabling homeowners to access affordable finance through which to improve their homes”.
This pilot scheme is an important part of the Energy Efficient Mortgages Initiative, which is aimed at delivering a standardised European framework and data collection process for energy efficient mortgages.
There has been an extensive consultation of major stakeholders in the lead up to this pilot scheme. It includes feedback gathered during a series of national roundtable events with banks, building energy performance experts, property valuers and utilities.
Luca Bertalot, Energy Efficient Mortgages Initiative coordinator, said: “This initiative is intended as a clear response to the call for concrete market action to support the Capital Markets Union, growth, financial stability and energy efficiency agendas. We are excited that the major European lenders from a wide range of jurisdictions have recognised the importance of the initiative and have committed to road-testing it. They represent 45 per cent of the European outstanding mortgages, which amounts to 21 per cent of European GDP.
“More importantly, the significant critical mass that these pioneers constitute underlines the willingness of the market to take action and to play a pivotal, potentially game-changing role in supporting the European Commission Action Plan on Sustainable Finance, by designing common, multi-stakeholder market best practices.
“The pilot scheme will provide real business responses to the challenges of designing a market framework for energy efficiency financing and supporting the EU’s transition to a more sustainable future.”
Energy-efficient homes are acknowledged to hold their value better over time, which also reduces risk for both borrowers and lenders. There is rapidly growing investor demand for green mortgage backed-bonds, contributing to the business case for lenders to provide more attractive mortgages for purchasers of such homes.
The pilot supports the European Commission’s recently published Action Plan on Sustainable Finance, which contains measures to investigate the feasibility of incorporating sustainability considerations in the prudential framework and is aimed at boosting private investment in low-carbon technologies like renewable energy while increasing transparency in sustainable finance to avoid greenwashing.
The Commission wants to leverage the contribution of the private sector. The action plan contains four elements:
- a unified EU classification system, identifying activities that qualify as “sustainable”, taking into account existing market practices and initiatives and drawing on the advice of a technical expert group
- investors’ duties and disclosures, which include following guidelines on how to integrate environmental, social and governance (ESG) factors in their investment decision-making process
- low-carbon benchmarks; a “low-carbon benchmark”, which is a “decarbonised” version of standard indices, and a “positive-carbon impact benchmark”, that allows investment portfolios to be better aligned with the Paris Agreement objective of limiting global warming to below 2°C
- better advice to clients on sustainability; the European Commission is consulting on how best to include ESG considerations into the advice that investment firms and insurance distributors offer to their clients
According to Jyrki Katainen, European Commission vice-president responsible for jobs, growth, investment and competitiveness: “To achieve the EU’s 2030 climate targets, we need around €180 billion [AU$283b] a year of additional investments in energy efficiency and renewable energy. Mobilising private capital to fund sustainable investment is essential.”
David Thorpe’s two new books are Passive Solar Architecture Pocket Reference and Solar Energy Pocket Reference. He’s also the author of Energy Management in Building and Sustainable Home Refurbishment.